Trump economy reaching his 3 percent goal even without tax reform

President Donald Trump’s goal of 3 percent growth has been realized in two of the three quarters since he took office, and economists say the trend can keep going for at least another quarter and possibly longer.

Third-quarter GDP grew by 3 percent, well above the 2.5 percent expected by economists surveyed by Thomson Reuters and below the 2.8 percent in the CNBC/Moody’s Rapid Update. The third-quarter number comes on top of 3.1 percent growth in the second quarter, making for the best back-to-back quarters since 2014 and ending a long streak of sluggish 2 percent growth.

One factor aiding the improvement was an 8.6 percent annualized rise in business spending on capital equipment, coming on top of an 8.8 percent pace in the second quarter.

“Give credit where credit is due,” wrote Chris Rupkey, chief financial economist at MUFG Union Bank. “Trump’s economics team has been steering the country since January, and the economy has hit the Administration’s 3 percent target two quarters in a row. … This economy in its ninth year of expansion shows no sign of tiring and turning down and may outlast the 10 years of growth during the Clinton presidency.”

Rupkey, in a phone interview, said the report was less affected by hurricanes than expected, and the only piece of data that really has been washed out by hurricanes Harvey and Irma was the September jobs report, which showed a decline of 33,000 payrolls. As a result, economists are forecasting a 310,000 jump in payrolls in the October report when it is released next Friday.

Trump may not yet have delivered on his promises of infrastructure spending, health-care reform or tax reform, but some economists say one factor behind the pickup in the economy may be related to optimism about the future based on expectations for tax cuts and his pro-growth policies. Congressional Republicans are expected to introduce a bill on Wednesday that would cut corporate and individual taxes.

The White House on Friday took credit for the better growth but said Congress now needs to act on tax cuts and other Trump agenda items. The White House also released a new report that said tax cuts could deliver 3 to 5 percent GDP growth.

“With unemployment at a 16-year low, the stock market at new highs and economic confidence soaring, the U.S. economy is surging under this President’s leadership. America can continue this momentum if Congress adopts our framework for major tax cuts and other key agenda items that will allow Americans to keep more of their money, make our businesses more competitive, and build an economy that works better for everyone,” said White House Press Secretary Sarah Sanders.

Trump said he believed growth could even go higher than 3 percent when he was stumping for tax reform in Missouri in the summer.

“If we achieve sustained 3 percent growth that means 12 million new jobs and $ 10 trillion of new economic activity. That’s some number,” Trump said during an August speech promoting tax reform. “I happen to be one that thinks we can go much higher than 3 percent. There’s no reason we shouldn’t.”

Scott Anderson, chief economist at Bank of the West, said he wouldn’t necessarily attribute the better growth to Trump’s policies, but he said there could be some optimism because of the promise of them. “It’s certainly feeding into the optimism and the anticipation of tax cuts,” he said. Anderson said another big factor has been the Federal Reserve and its policy of keeping interest rates low for a long time while inflation has remained low.

The jump in business spending in GDP was a welcome surprise, and it helps broaden out the engines behind growth. “Partly it’s a reflection of increased optimism about the economy, and we’ve seen big increases in manufacturing PMIs and confidence measures and that could be feeding through to animal spirits. Business investment is difficult to forecast partly because it comes down to expectations,” said Anderson.

He currently expects 2.9 percent growth for the fourth quarter but said it could easily swing higher to 3 percent or more. The CNBC/Moody’s Analytics Rapid Update shows a consensus of 2.9 percent.

“I think it’s certainly in the ballpark. So again that would be a string of three consecutive quarters of 3 percent growth. That’s a very strong performance for this expansion,” said Anderson.

Anderson said the fact that the economy is near full employment could be one factor driving spending, as employers seek new equipment and technology to help them.

Economists expect the rebuilding after the hurricanes to be a positive impact on fourth-quarter growth. Joseph LaVorgna, chief economist for the Americas at Natixis, said that could help push growth closer to 4 percent.

“It’s not inconceivable that we get there,” LaVorgna said. “The issue, of course, is where we go from here, and that’s a function of two things: What do the tax cuts, assuming we get them, look like, and the other thing is who is running the Fed.”

LaVorgna said the question is whether the Fed, if growth picked up, begins to raise interest rates more quickly. Trump is expected to name a replacement for Fed chair Janet Yellen next week.

“Under the old regime … they would be hiking literally the day the tax cut was signed because they would be worried about the economy overheating,” he said.

Rupkey said one concern in the third-quarter GDP report was that 0.7 percent came from inventories. “Inventory accumulation can melt away in an instant,” he said.

LaVorgna said it’s possible that productivity is picking up, based on the third-quarter GDP report. “There might be a productivity revival coming in the data. That could be galvanized by corporate tax reform. You clearly have had a depressing effect on construction in this report … and you’re going to get a snapback there,” he said.

There’s a batch of key economic reports in the coming week, and they could look strong, but Rupkey says it would be hard to top recent momentum, particularly in ISM manufacturing. ISM is expected to come in slightly below last month’s 60.8, at 59.5. Anything above 50 represents economic growth.

Last month’s number “shot the lights out,” Rupkey said. “I don’t know if it’s going to go any higher.” He added that the key will be trends in wages, with the employment cost index and the average hourly earnings both coming out next week.”

The economy was pretty strong in this cycle data a month ago, leading up to the jobs report. I don’t know that it could do any better than that. Almost every other piece of data was good,” said Rupkey.

Anderson said he expects another run of strong reports in the coming week. Personal income and spending are reported Monday, consumer confidence and employment costs Tuesday, car sales and ISM Wednesday, productivity Thursday and jobs on Friday.

“I think most of the indicators are a little bit above consensus. I think we’re going to have another round of positive economic surprises next week, which are going to be a welcome surprise for the stock market. I’m a little more concerned about the bond market. I’m a little worried rates could start rising here,” he said.